Hooray(?) for Amazon’s Price Check

The Wall Street Journal posted a column by Al Lewis called Info-Age Shoplifting, railing against Amazon’s new Price Check app for iPhones. He references and builds on another scathing article, Amazon’s Jungle Logic, by Richard Russo published in the New York Times. Both of these are ill-informed knee-jerk emotional reactions to a smart and reasonable business strategy that just may help the people that these writers are claiming to protect.

Price Check is an iPhone app that Amazon released so shoppers can scan the UPC code of an item while at a brick and mortar store and then upload the price of that item to Amazon. The shopper earned a $5 coupon on Amazon. (There are more details, but that is the gist of it.) The intent is for Amazon to collect prices of competitors, enlisting the masses to help.

The anti-Amazon crowd whines that this allows Amazon to know everyone’s prices and undercut them. This will eventually put all brick and mortar stores out of business. The poor mom and pop stores have no chance.

BS! What an amazing extrapolation of fantasy. It could quite possibly do the opposite.

The issue here is price information. Price information works one of two ways. Two companies, who know each others’ price information, compete vigorously on price, enter into a price war, and everyone loses. Or … the same two companies know that each other knows their prices, and choose to compete on attributes other than price. This is implicit collusion, holding prices higher in the market. Think of two gas stations across the street from each other. They could compete aggressively with price, or attempt to stay at a value-adjusted parity.

The complaint against Price Check is that Amazon will learn prices from the mom and pop stores. So what? Amazon is not going to change prices to compete with mom and pop. Amazon may change prices to compete with Wal-Mart or any retailer that is dominant in their market space, but this is not the emotional put-mom-and-pop-out-of-business scenario. Small retailers can charge anything they want and Amazon will not respond.

You’re a small business owner, what should you do? Three things:

1. Don’t worry about someone using Price Check in your store. This person is tech-savvy and probably isn’t going to be a customer anyway. However, try not to waste resources serving them.

2. Use Amazon’s same technique. You have access to the prices that Amazon charges. Watch them. Use that information while setting your prices. This is especially true for all products where you think customers will shop for prices. Check out the web site www.camelcamelcamel.com for Amazon’s historical prices.

3. Most importantly – DO NOT COMPETE ON PRICE against Amazon. Know their prices, and charge a little more. Focus on the value that you add: immediate delivery, personable help, easier returns, etc. Your role is to add value over Amazon so you can charge a little more. People who do not appreciate your added value will buy from Amazon. You need to attract and capture the customers who do appreciate your value.

Although it is impossible to tell, my belief is that Amazon’s Price Check is more likely to hold prices higher. When Wal-Mart knows that it can’t stealthfully undercut Amazon, they will do it less often. Mom and Pop’s real fear should be a price war between Amazon and Wal-Mart. If these two behemoths get into a price war, mom and pop stores will suffer. But if Amazon and Wal-Mart find a way to implicitly collude by knowing each others’ prices, it holds prices up so the mom and pop stores have more room to make money. There is more money to share between them when they implicitly collude.

As small businesspeople, let’s hope they implicitly collude. Of course as consumers, we prefer the price war.